A Snapshot Of Bond Valuations
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View from the Observation Deck  
  1. Today's blog post is one we do ongoing so that investors can monitor fluctuations in bond prices relative to changes in interest rates. This one features activity from the all-time high in the stock market on 2/19/20 through 3/20/20 (1 month). 
  2. The yield on the benchmark 10-year Treasury note fell from 1.57% at the close on 2/19/20 to 0.85% at the close on 3/20/20, or a decline of 72 basis points (bps), according to Bloomberg. 
  3. Since 2/19/20, the Federal Reserve ("Fed") has decreased the federal funds target rate (upper bound) by 150 bps, from 1.75% to 0.25%, according to Bloomberg. For the 30-year period ended 3/20/20, the federal funds target rate (upper bound) averaged 2.90%.
  4. With respect to the Fed's about-face on monetary policy, the plunge in the federal funds target rate (upper bound) to 0.25% means the Fed is now back to where it held rates from the end of 2008 through the end of 2015. That signals a problem is at hand. 
  5. While the Fed was battling the financial crisis in 2008, and for several years thereafter, the problem today is COVID-19, a coronavirus pandemic. The manner in which the Trump administration, and some governors, have chosen to mitigate the anticipated escalation of the virus is by literally shutting down large chunks of the economy to enable millions of people to shelter in their homes. The Fed is also doing what it can to inject much needed liquidity into the debt markets.  
  6. As indicated in the chart above, despite the plunge in interest rates, there was tremendous selling pressure in the bond market over the past month. The only categories that weathered the storm were government-backed securities. 
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The ICE BofAML 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions with a remaining term to maturity greater than or equal to 22 years. The ICE BofAML Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The S&P/LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the largest segment of the U.S. syndicated leveraged loan market. The ICE BofAML 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years. The ICE BofAML U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofAML U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofAML Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and Eurobond markets. The ICE BofA Freddie Mac Mortgage Backed Securities Index is a subset of the ICE BofA U.S. Mortgage Backed Securities Index including all generics representing pools issued by Freddie Mac. 

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Posted on Tuesday, March 24, 2020 @ 12:53 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.